×

Brazil economy sinks into worse-than-expected recession

Brazil's economy shrank 1.9 percent in the second quarter, sinking into a recession that has hammered the popularity of President Dilma Rousseff as she struggles to save the country's investment-grade credit rating amid a vast corruption scandal.

The quarterly contraction, reported by government statistics agency IBGE on Friday, was bigger than the median forecast of a 1.7 percent drop in a Reuters poll.

Rousseff's efforts to cut spending, raise taxes and rein in inflation have failed to lift business and consumer confidence from record lows and left her governing coalition in tatters.

Dilma Rousseff, president of Brazil
Ueslei Marcelino | Reuters
Dilma Rousseff, president of Brazil

Investment fell 8.1 percent, declining for the eighth straight quarter in the longest such streak since the current data series started in 1996. Household consumption fell 2.1 percent, the worst drop since 2001, as unemployment hit a five-year high and consumer prices jumped 9 percent in 12 months.

"The drop in consumption shows the crisis of confidence the economy is facing," said Newton Rosa, chief economist with SulAmerica Investimentos. "This is going to be an intense and prolonged recession and I don't see a recovery this year."

Rousseff's approval rating has fallen into single digits in recent polls as the economy sputters and the political mood sours, worsened by mounting evidence of a kickback scheme that funneled billions of dollars away from state-run firms.

Read MoreBrazil has 2 kinds of problems, and they're both bad

Brazil's biggest engineering groups have had executives jailed and contracts frozen in the scandal, which threatens to freeze major public works and investments in the energy sector.

Political fallout from the scandal has also turned key congressional allies against Rousseff, sabotaging her austerity efforts and emboldening the opposition's calls for impeachment.

Government spending rose 0.7 percent in the second quarter.

Read MoreWhy a slowdown in Brazil is almost as bad as the China slowdown

Credit rating agencies have cut Brazil to near-junk status this year and warned of more downgrades if the government cannot close a budget gap and lay the foundations for economic growth.

"The economic activity indicators are critical for Brazil's investment grade rating," said Siobhan Morden, head of Latin America strategy at Jefferies. "Expectations for growth this year and next year are still prone to downward revisions."

IBGE revised first-quarter growth to a 0.7 percent drop, down from a decline of 0.2 percent reported in May, which should force economists to revisit their annual forecasts.

Economists already expect Brazil's economy to shrink more than 2 percent this year, the worst drop since 1990, and keep contracting in 2016, according to a weekly central bank poll.

Follow us on Twitter: @CNBCWorld